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Absurdity of the Staggered Board

With a staggered board, board members are grouped into classes. Each class typically represents about a third of the total number of directors, and only one class comes up for election in a given year, thus assuring that it will take more than one costly proxy fight to gain a majority of the board seats.  An activist shareholder attempting to effect change at a company that has a staggered board has to mount, finance and win at least two very costly proxy contests over a period of at least two years to gain a majority of the board seats. Even if the activist has the support of the majority of shareholders, the activist would still need to work through two hard years to obtain control of the board.

To make matters worse, under Delaware’s General Corporation Law which governs the majority of public companies, directors on a staggered board can only be removed for cause unless the certificate of incorporation provides otherwise, which it never does. This is true even if a majority of the shareholders want to replace the existing board.

If a company has a staggered board it is nearly impossible to change control of that company in less than two years.  But as we all know, two years in the life of a poorly managed company is an eternity.  Although this is not a problem unique to United States markets it is by no means universal.  In many countries the ability of shareholders to call a meeting and remove and replace directors is enshrined in the local law of the jurisdiction. This prevents the stagnation and abuse of shareholders that a staggered board can promote.

It is time for all public U.S. companies to be governed by a policy that allows significant shareholders to call a meeting at which the entire board can be removed and replaced by the vote of a majority of the quorum. This sensible policy would be a major step in the right direction to promote shareholder democracy and would put the United States on par with other countries that value the efficient management of critical engines of their economies---public corporations-- over the interest of entrenched managements.

Something can and should be done. We need to let our Washington representatives know how critical these issues are to shareholders. We need to make management and boards accountable. We need… change.


If a majority of companies really have bad corporate governance like staggered boards, increasingly dumber CEO's etc. wouldn't it be easier for society as a whole to resolve this issue by having shareholders dump the stock instead of getting the "authorities" to regulate corporate governance.

The way I see it this is more of an investor awareness & education issue than regulation by the government. No one forced an investor to buy shares of a company with bad corporate governance. If a majority of investors invested mostly in companies with good corporate governance thereby rewarding them and punishing the rest by implication, then you would have mostly companies with good governance surviving and the rest perishing.

Problem is not many investors (especially retail) look into corporate governance when making an investment choice. When you invest in a company you are also investing in it's corporate governance, management etc. which is usually pretty well laid out in its public filings. It's another matter that it's very difficult for ordinary investors to go through public filings to get the essence of all these issues.

Now if only some products/services could bring in greater transparency into the system with objective information about a company's corporate governance etc. in an easy to digest format and investors start recognizing the importance of these as opposed to analyst ratings the whole issue arround corporate governance could be self-policed by the market - may be the next step in the evolution of the financial market, but can't really see this issue bringing down the whole economy.

In response to the comment that we should let the market resolve the corporate governance issue, I think your point is an excellent one: with more tools, education, and awareness of investors, we should see a decline in these forms of corporate governance. However, I think there is an argument that a legal intervention is appropriate in this circumstance, because laws--in addition to achieving desirable, practical outcomes--exist to enforce principles.

In this case, I liken the principle of shareholders' rights to citizens' voting rights. Just as citizens should abhor any mechanism that disenfranchises them from their right to participate in the political election process, we should abhor any mechanism that disenfranchises owners from controlling their property. There is no reason management should be able to hijack the shareholders' property in any way, and the law should reflect that.

I agree wholeheartedly with Renegade. Nothing forces shareholders to invest in companies with terrible corporate governance. If you have a problem, and you want to make it ten times worse, ask for government intervention.

Government intervention has a number of universal adverse consequences, which can't be listed in full on a blog comment - you'd need a book, and then you'd need a coffee table made of reinforced steel to hold its weight. But the most obvious are: expansion of bureaucracy; creation of a dangerous precedent; and complacency and buck-passing by those who remain in the free market, including corporate boards, who are given ever more reason to say "Well that's not my responsibility, it's the government's."

And the first rule of government intervention is that for every consequence you can see, there are fifty you can't.

As they say, the most terrifying words in the English language are "I'm from the government and I'm here to help" - the last thing anyone should do is go looking for it unless there is no other option. If a problem can be rectified by people exercising a free choice that they already have - in this case, withholding investment from companies with bad corporate governance - then there is no reason for government intervention.

What I believe Mr. Icahn is trying to point out is that dumping stocks is not always the best option, or should we say, the most viable option in the long-term.

If we look at it differently, dumping a stock is the equivalent of moving from one country to the other because you disagree with the regulation environment. The point is that there are other options than moving and that's getting involved in politics or at least speaking out loud to say what you consider is wrong.

Also, government intervention is rarely highly effective but laws are not the same as government intervention. That’s why the legislative power is separate from the governing power. Laws are critical to free markets. A strong legislative structure creates a strong and competitive economy. The excessively flexible law system which governs our banking sector is the main reason why the credit crisis emerged. Look at banks in Europe or even in Canada. There are now all biding to acquire our banking symbols, such as Lehman.

Thus adding laws to better protect us, shareholders, cannot slow down the system. It will only create a safer place to invest and attract more people.

Renegade and Sam B are fools.

We're not asking for government to intervene in the market place. We are asking for government to secure and protect our rights as the owners of these companies. This is one of the few legitimate functions of government and as such is regularly cited by Heritage Foundation and others as one of the essential elements of economic freedom.

Management already owes us a fiduciary obligation to maximize shareholder value. It is government, mainly through the corruption of the Delaware statue and case law, that has allowed management to hijack these companies that we actually own. As owners, we are rightfully demanding that our property rights be respected and restored.

It is ludicrous to suggest that we as owners should sell our company rather than replace its ineffective employees. That makes about as much sense as selling your house because your gardener repeatedly breaks off your sprinkler heads.

If we were to dump the stock because we don't have any other alternative, what company do we reinvest in that can give us the shareholder rights we should demand? Not many, if any, I presume. This, then, is not a good alternative.

Besides, if I like the company and its products and/or services, why should I have to sell my stock just to make my point with management?

Let's also not forget that all corporate boards have committees that are created solely for 'oversight' to help the board (to help the company). Two that stand out are the "Ethics Committee" and "Audit Committee".

As in our federal government, these committees are bloody useless.

If these board committees were truly interested in excellence in ethics and audits, then there would be more accountability within the board. Unfortunately, these committees are made of of the board members themselves!!! Talk about the fox guarding the hen house.

I believe these committees should have a large makeup of institutional shareholders and no cronies!

Randell Young, above, is absolutely right. Companies are being stolen from the owners by the management team & the board. We are asking for proper rights to the owners not "government intervention". I built my business, I invested everything I have in it, I understand risk and reward and as such I deserve the rewards but what about the guy that follows me??? does he?. It kills me to see management that did not build and did not invest to create a company get away with millions in compensation and special deals, Bill Gates has a real claim to Microsofts money but what about Bob Nardelli? he did zero for Home Depot and walked away with millions... how come?,, it is totally wrong. This is a way to improve our companies and make them accountable to the owners. That is the way it should be.

I agree with Icahn on this.

Boards are supposed to represent shareholders, and if shareholders want change, boards should facilitate that change, not fight it.

Staggered boards allow ignoring calls for change even if they make a lot of sense. It allows directors to put their personal interests above the interests of the shareholders they ought to represent. It goes counter to their fiduciary duties.

Yes, you can dump a stock, but that's effectively admitting that even though you are an owner, you have essentially no control. This exacerbates the principal-agent problem.

If you buy something and it gets broken, you have certain rights in getting it fixed. Just being able to sell it if you're unhappy is not enough.

Boards are there to protect these rights, and having laws to prevent them from giving their own interests more priority makes sense.

There is a Russian saying that says who pays that orders music. Not always but it is the truth. If the investor's stock is significant and this investor has desire to take part in management, the company management should listen to their opinion and whenever possible consult it in serious decisions.

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